TELECOMS: China Telecom Spins Off Content Unit

Bottom line: China Telecom's sale of several
key entertainment assets to a separately run and listed unit
reflects the company's more dynamic nature compared with its 2
peers, as it tries to create services that can compete with
private-sector rivals.

China Telecom spins off entertainment services

China Telecom (HKEx: 728; NYSE: CHA) is showing
once more why it's a telco to watch, with word that it's formally
spinning off 4 of the main entertainment businesses on its main E
Surfing platform to one of its independently run and listed units.
In this case the telco is spinning off the four to its fully-owned
but separately managed Besttone
Holdings (Shanghai: 600640) unit, in what looks like a bid
to make these services more competitive with private sector
rivals.

The bigger story is that China's telecoms regulator is trying to
breathe some life into the nation's big 3 telcos, though each
is responding differently to that call. Dominant
player China Mobile (HKEx: 941; NYSE: CHL) seems
to think it's doing just fine as it is, and isn't in any rush to
try new things.

Perpetual laggard China Unicom (HKEx: 763; NYSE:
CHU) has been selected to participate in an official Beijing pilot
program that will bring in private investors to the company on a
limited basis. But the company is being quite slow and cautious in
its approach, despite big enthusiasm from China's big 3 Internet
companies to be chosen as partners. I expect any deals it reaches
will ultimately get mired in Unicom's endless bureaucracy.

That brings us back to China Telecom, which is emerging as the most
dynamic of China's big 3 telcos, as reflected by this move that
appears to be its own initiative rather than state-ordered. Under
the deal, the company's Besttone unit will take over 4 of the main
content units on E Surfing, China Telecom's main division providing
such services on its platform. (Chinese article)

Besttone will pay nearly 4 billion yuan ($570 million) for the four
units, which cover everything from E Surfing's video service, to
its online printed literature and animated entertainment. The move
will make the 4 services the first to be independently operated on
a China Telecom platform.

The report points out that all four of the services previously had
outside strategic investors, owning anywhere from 20-35 percent of
each unit. But it appears that each of those is being forced to
sell its stake to Besttone, which is taking over full ownership of
all 4, according to the reports.

Simplification

Thus this particular move isn't quite as revolutionary as it might
look, since each of the units previously did have an outside
state-owned media partner that was probably the main content
provider for its service. But in simplifying these units into a
single separate company like Besttone, China Telecom certainly
seems to be taking a necessary step towards trying to make E
Surfing a more serious and dynamic business.

All four units are now profitable, though just barely. Only one
posted a profit of more than 10 million yuan in its latest quarter,
which equates to a paltry $1.4 million and is inconsequential to a
big company like China Telecom. By comparison, hundreds of
private-sector app makers are probably soaking up far larger sums
of money from China Telecom subscribers with better run and
operated rival services.

I've previously said that China Telecom looks like the most dynamic
of China's 3 big telcos, as it seems the most focused on trying to
leverage its platform to build up a big 4G user base and provide
its own compelling products and services. Investors seem less
convinced, giving China Telecom a price-to-earning ratio of 12,
similar to China Mobile and well below Unicom's sector-leading
multiple of 17.

Unicom is really the least dynamic of this trio, but I suspect its
high multiple includes big hopes for a turnaround after it sells
some of its assets to private sector partners in the pilot program.
Meantime, I personally would still pin my longer-term hopes on
China Telecom for taking matters into its own hands and trying to
become more dynamic on its own without prodding from Beijing.